Is the Era of American Exceptionalism Fading? Why Global Investors Are Shifting Focus to Europe

The world is rebalancing—and so are portfolios.

For over a decade, U.S. equities have been the centrepiece of global investment strategies. With the dominance of Big Tech, world-class capital markets, and the promise of artificial intelligence-led growth, the S&P 500 has drawn in trillions from international investors seeking exposure to the "world’s greatest companies." But in 2025, the narrative is starting to shift.

As of mid-March, the S&P 500 is down 3.6% YTD, while the Stoxx Europe 600 has posted a healthy 8.3% gain. The DAX, Germany’s flagship index, is up nearly 15%—a move catalysed by Berlin's approval of a €1 trillion fiscal stimulus plan, much of it earmarked for defence and infrastructure.

From FOMO to Fundamentals

The pivot away from U.S. stocks is not just emotional or political (though investor sentiment is clearly shaken by heightened U.S. protectionism and foreign policy unpredictability). It’s fundamentally data-driven.

Valuations are a central concern. The forward price-to-earnings ratio for the S&P 500 currently hovers around 24.6, compared to 18.7 for the Stoxx 600 and under 13 for Hong Kong’s Hang Seng Index. Put simply, investors are being asked to pay a premium for U.S. growth—without a commensurate reduction in macroeconomic or geopolitical risk.

Moreover, flows into U.S.-based ETFs with exposure to European stocks saw a net $2 billion increase in the first two months of 2025, reversing a sharp outflow trend from late 2024. Meanwhile, the pace of inflows into U.S. equity ETFs has slowed notably. This is a clear signal: capital is looking for better relative value.

Europe Awakens: The Defence Dividend

European equities have long been criticised as stodgy and yield-driven—favourable for income but lacking in dynamism. But things are changing.

Germany’s fiscal package is part of a broader continental trend. With the U.S. retreating from global policing and NATO allies under pressure to spend more on defence, European governments are ramping up military budgets. This is creating strong tailwinds for regional defence contractors such as Rheinmetall, Leonardo, Saab AB, and Thales.

Unlike the U.S. “Magnificent Seven” tech rally, where growth expectations are already baked into valuations, European defence is still arguably in the early innings of a multi-year re-rating. In my view, this is not just a tactical trade—it’s the beginning of a structural rotation.

Risk, Currency, and the Need for Local Insight

Of course, investing outside the U.S. isn’t risk-free. The European Union remains a fragmented economic bloc, with disparate fiscal policies, political landscapes, and demographic trends. Currency risk (particularly for sterling or dollar-based investors) must also be accounted for.

But for globally-minded investors, these risks are manageable—especially in the face of deteriorating U.S. consumer confidence, sticky inflation, and rising political uncertainty heading into the 2024 U.S. election aftermath. Diversifying internationally is no longer a luxury; it’s a hedge against domestic fragility.

MY TAKE: Diversify with Intent

I remain bullish on select U.S. sectors—particularly those tied to AI infrastructure, semiconductors, and software. However, I am actively reallocating part of my portfolio to European ETFs and direct equity exposure in sectors benefiting from fiscal stimulus and geopolitical rearmament. I’m also eyeing EM valuations, particularly in Asia, though that requires deeper analysis of country-specific risks.

In short, we may be at an inflection point where the next leg of global equity outperformance comes not from Silicon Valley—but from Stuttgart, Stockholm, or Paris.

The age of American exceptionalism isn’t over—but it's being re-evaluated. Investors should take note. The global economy is shifting, and with it, so too should our portfolios.